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Investor billions wiped out at NSE as weak shilling, depressed sales dampen 2015 profits

By Frankline Sunday | Dec 8th 2015 | 7 min read
By Frankline Sunday | December 8th 2015

After 2014 saw it celebrate its 60th birthday, launch the Growth and Enterprise Market Segment (GEMS) and self-list at a 600 per cent over-subscribed initial public offering, investors at the Nairobi Securities Exchange (NSE) looked forward to an even more bullish 2015.

But with the All Share Index dropping by 12 per cent in the year to date, and only 11 listed firms registering a cumulative gain in stock price over the period, 2015 has been one of the worst for East Africa’s largest security exchange.

Since the beginning of the year, a total of 11 listed companies have issued profit warnings, an Old Mutual Securities Research note reports, with shareholders watching in despair as billions of shillings get wiped out from the book values of several firms. Eleven listed firms also issued profit warnings last year, up from eight in 2013.

According to investment analysts, the poor performance has been due to a combination of factors, including a weak shilling, fraud in the keeping of accounts and increased competition for a relatively small market.

The shilling depreciated by 13 per cent in the first 10 months of the year on account of the strengthening of the dollar brought on by the US economy marginally outperforming other developed economies.

At the same time, uncertainty around the US Federal Reserve’s decision to raise interest rates for the first time in seven years caused jitters among NSE investors, a big chunk of whom are foreigners.

Emerging economies

According to the World Bank, Kenya’s economy has benefited immensely from the Federal Reserve’s stimulus in both short and long-term capital inflows.

“Yields on shilling-denominated assets have been high, outstripping depreciation risks and large interest rate differentials, making Kenya a more attractive destination for world capital than many other emerging economies in Africa as a whole,” the institutions said in the latest edition of the Kenya Economic Update report.

“With the ending of the Fed’s monetary stimulus, the flow of cheap capital that has been funding the current account could dry up, as investors build up their dollar-denominated assets, creating volatility in the foreign exchange market.”

The results of all this macroeconomic activity on the country’s listed companies has been telling.

On one hand, the weakening currency has meant robust business for agricultural firms whose exports are paid for in dollars.

Williamson Tea, for instance, saw its net profits in the six months to September increase more than 100 per cent to Sh380.7 million. Kapchorua Tea doubled its half-year earnings to Sh100.4 million.

In fact, five of the top 10 best-performing counters at the NSE this year were agricultural stocks, led by Kakuzi, whose share price has appreciated by more than 50 per cent.

On the other hand, a weak shilling has meant exchange rate shocks for firms that had taken up a lot of debt denominated in foreign currency.

East African Cables, the country’s largest manufacturer of electricity cables, in August issued a profit warning for its 2015 financial year after announcing a Sh70.9 million half-year loss.

The company cited exchange rate volatility and disruptions in its manufacturing processes as the main causes for the drop from a profit of Sh231.8 million over a similar period in 2014.

ARM Cement also cited weak Kenyan and Tanzanian currencies for its Sh645 million loss in the first nine months of 2015, down from a pre-tax profit of Sh1.6 billion over a similar period last year.

ARM chalked up as much as Sh2 billion in losses on its dollar-denominated debt meant to finance expansions and operations in Kenya and Tanzania. The loss made the cement firm one of the largest depreciating counters, losing 44 per cent of its value in just five months, from Sh43 billion at the beginning of March to Sh24 billion as at August.

Oil prices

Investment firm TransCentury issued a profit warning for a second year in a row after posting a Sh676 million loss in the first half of this year, which the management blamed partly on the devaluation of the shilling, leading to increased finance costs.

TransCentury turned to shareholders for a cash call after its Sh6 billion convertible bond failed to strike the right chord with investors, who were dissuaded by the stock’s free fall that has seen it lose 50 per cent of its value over the past year.

And you would think falling international crude oil prices would give Kenyan oil marketers something to smile about.

However, in the first half of 2015, Total Kenya reported a Sh191 million foreign exchange loss — four times higher than the Sh42 million reported over a similar period last year.

These losses from the forex market contributed to the company’s 16 per cent decline in profits after tax to Sh525 million from Sh631 million last year, and a further 29 per cent decline in overall turnover.

KenolKobil, another local oil marketer with a regional presence, however seemed to have braved the headwinds, raking in Sh1.35 billion in pre-tax profits for the first half of 2015, a 69 per cent surge compared to a similar period last year.

The firm’s managing director, David Ohana, however, admitted that the company had felt the pinch of exchange-rate shocks and high interest rates, necessitating a change in the firm’s capital mobilisation strategy.

“We have completed paying off the $120 million [Sh12.2 billion] facility we had,” he said.

“It has become very expensive to borrow from local commercial markets, so all the projects we are engaging in from now henceforth will be financed by internally-generated revenue.”

Kenya’s largest mobile service provider, Safaricom, also recorded exchange rate losses even as it posted Sh32 billion in net profits for its financial year to March, cementing its position as the country’s most profitable company.

The telco has been the NSE’s most-traded stock this year, with 2.6 billion of its shares — valued at an average of Sh38 billion — exchanging hands. Its share price has gained 14 per cent cumulatively over the past year.

When announcing its half-year results in November — a 23 per cent growth in net profits to Sh18.1 billion — however, the firm reported a Sh690 million loss on account of exchange rate shocks.

Sales Revenue

For other companies, accounting misappropriations eroded earnings, compounding the effects of a tumultuous year.

Last month, the country’s sole listed retailer reported Sh3.2 billion in losses for its year ended June 2015 and revealed that its management had over the past three years doctored the retailer’s books to the tune of Sh1.04 billion. It was the first time the retailer was announcing a loss since it came out of receivership in 2010.

Other listed companies that have faced allegations of manipulation of their books include Mumias Sugar, Kenya Airways and CMC Holdings.

Warehousing and logistics company Express Kenya also recorded Sh23.2 million in losses for the six months to June this year, informing shareholders that “the company has been going through a period of business instability due to the loss of key contracts”. The management is now planning to diversify into real estate.

Longhorn Publishers, East Africa’s only listed publishing firm, also had a poor year, with the company’s stock plummeting 56.8 per cent since January.

The firm posted a 39 per cent drop in sales revenue from Sh1.4 billion last year to Sh848 million for the year ended June 2015.

Profit after tax went down by 24 per cent to Sh71 million, which the company blamed on depressed sales in its Uganda and Tanzania subsidiaries, as well as reduced book sales across the whole region.

Logistics firm Atlas Development, which listed at the NSE in December 2014, last week announced plans to liquidate its loss-making Kenyan operations and focus on Ethiopia.

The company recorded a loss of Sh1 billion in the year to June 2015, following a downturn in the oil and gas industry, which CEO Carl Espry said has meant clients no longer see the value in paying a premium for Atlas’ services.

The firm has also been weighed down by increased pressure from its creditors, and delays in receiving payments from key clients.

Atlas will retain its GEMS listing, though its stock has lost 85.9 per cent of its value since January.

Real estate company Home Afrika, became the first firm in June 2013 to list its shares on the Nairobi bourse’s GEMS counter at an introductory offer price of Sh12.

The firm’s share price soared in the weeks after the flotation, at one time hitting a high of Sh25 and doubling the value of the real estate company.

Out the door

This year, however, Home Afrika has seen its share price plummet by 64 per cent. An announcement of a net loss of Sh118.1 million in the half-year ended June from a net profit of Sh42.9 million the previous year did not help matters, and the CEO was sent packing three months later.

The top managers of national carrier Kenya Airways could also be headed out the door after Parliament last week questioned their competence. This followed the culmination of months of a Senate inquiry investigating the performance of the listed airline.

In July, Kenya Airways shocked both taxpayers and corporate Kenya when it posted a loss of Sh25.7 billion, the largest loss registered by a listed Kenyan company. And then in November, it announced a Sh12 billion half-year loss, deeper than the Sh10.5 billion announced over a similar period last year.

The reasons given for the airline’s sustained losses are numerous and include falling tourism numbers, fuel hedging gone wrong, high operating costs and poor management.

Kenya Airways’ stock has shed 43 per cent of its value in the past year, with the focus now turning to the implementation of the Senate committee’s report, which many believe contains a bailout of some kind.

While it has been a tough year for Kenyan firms, the outlook going into 2016 does not seem to be too positive.

“The currency has made some gains over the last few weeks, however, market sentiment is that this may not last and means that it might take longer for companies to recover from the dip in earnings. As a result of the poor earnings, dividends declared and paid out shall be lower in the coming year,” Old Mutual Securities Research said in an investor note last week.

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